Chase exec: we tricked naive borrowers into taking out subprime loans

An award-winning Chase vice-president has gone public with accusations that his bank deliberately tricked naive borrowers into taking out high-commission loans they could never pay back (his team wrote $2B in loans during the subprime bubble), putting the lie to the narrative that subprime was about greedy borrowers taking money they knew they shouldn't:

One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.

These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up.

Theckston, who has a shelf full of awards that he won from Chase, such as “sales manager of the year,” showed me his 2006 performance review. It indicates that 60 percent of his evaluation depended on him increasing high-risk loans.

In late 2008, when the mortgage market collapsed, Theckston and most of his colleagues were laid off. He says he bears no animus toward Chase, but he does think it is profoundly unfair that troubled banks have been rescued while troubled homeowners have been evicted.

Well, they did, but there’s nothing inexplicable about it: when the banks are handing out free money to anyone who can fog a mirror, it’s quite explicable.

And yes, the money pipeline began with Barney Frank (Fannie and Freddie, you can find the videos of his denials of their situation on YouTube), the CRA (which rewarded banks that made these loans with approvals for mergers, allowing them to become Too Big To Fail), and most of all, Greenspan’s super-low interest rates, designed to give George “Ownership Society” Bush a second term in spite of a recession.

It was a toxic brew of government policy and banker greed, put in a margarita glass with an innocent-looking zero-down umbrella and and adjustable-rate fruit garnish, and offered up to unwitting consumers, who chugged it right down.

“CRA”, no.
They actually performed better than other lenders. This is a common narrative put forth to try to deflect the blame to poorer home buyers. Fannie & Freddie definitely played their role, but the CRA angle that places a lot of the blame on them is a right wing b.s. narrative.

CRA encouraged lower standards. Whether the people who got the CRA loans performed better or worse really makes no difference in the ultimate effect, which was to make those lower standards industry-wide. If you still want to argue that low lending standards are ok, well, I guess we’ll just have to keep re-learning that lesson until we get it, or are living in rubble.

This would be the same Krugman who was telling Greenspan to create a housing bubble in the wake of the dot-com bubble collapsing? The man is a financial terrorist.

Rebut the argument, not the man.

Also, regarding the CRAs “lowering lending standards” — no one held a gun to anyone’s head. The “industry” relaxed standards because they thought it would be profitable to do so. CRA didn’t establish standards for them by law. Did it on their own. Aren’t conservative types usually the ones crying about “personal responsibility”?

The problem is not the argument, it is the men. These are people with positions of responsibility and trust who gutted the system for personal gain…and this one apparently has a tiny speck of humanity left. Rebut the argument certainly, but this is not some polite debate, this is, or certainly should be, criminality on a vast scale. Phuque the man.

Yes, I read it. I’m curious what bearing you think it has. 2006, when this guy was operating, was already the end game. It was the final days of Babylon. And he was partying hard. Good for him. He is a detestable character, to be sure, but hardly a root cause. By 2004, the bubble was already rolling. In fact, that was the single biggest CRA year, with $1.63 trillion in CRA commitments. That kind of money pumped into a market will definitely distort prices, and if you look at the Case-Schiller graphs, the departure-from-the-mean was already obvious. By 2004 I was predicting that the party that won that election would lose big in 2008 due to the collapse of the housing bubble. And it turned out just that way. But I couldn’t have made that prediction if the problems just showed up in 2006.

The repeal of Glass-Steagall, and the lower standards encouraged by the CRA cut the brake lines. Cheap money hit the throttle. The ensuing collision with the wall was entirely predictable. (And not the fault of any one party. They both have dirty hands.)

By the way, the next stage is equally predictable. I stand by my record. And I’m telling you now: it ain’t over yet. By suspending mark-to-market rules in 2009, we’ve allowed the banks to pretend to be solvent, when they aren’t. There’s still a whole ‘nother crash just waiting to happen. That’s not even considering Europe’s insolvent banks, which we’re trying to cover like a cat pissing on a tile floor, with a new useless plan every week.

Get your money out of the too-big-to-fail while you can. They’re not, and they will.

Where am I excusing the rich or blaming the poor? I’m on record as wanting to see the bankers hung. But it wasn’t this banker who did it. Hang him anyway, but he was just a small fish, responding to rules & conditions created by bankers years before. Including the biggest banker of all at the time, Alan Greenspan. The only people who had less to do with it were the poor and ignorant who took the loans they were offered.

I think it’s funny that y’all are focusing on the low-level bankers vs. the idiot borrowers, as if that’s where the problem lies. It’s at a much higher level, among people who are still in power. But that would cause too much cognitive dissonance, since they’re in total control of the Obama administration. Low level boiler-room flacks are safe targets that don’t challenge your faith in the New Messiah.

I think it’s funny that y’all are focusing on the low-level bankers vs. the idiot borrowers…

That’s the sort of language that makes me wonder what’s going on in your head. The “idiot” borrowers went to a mortgage broker, a fiduciary, whose job it is to guide them through complex financial issues, and the fiduciaries fudged the numbers, fudged the paperwork, lied to their clients. If you go to a doctor and he does an unnecessary surgery on you so that he can collect the fee, does that make you an idiot patient?

CRA only offers a marginally lower interest rate, and reduced downpayment requirements. Income cutoffs still apply. Getting a plumber who makes 30k / yr into a 600k house requires outright fraud by the broker. They have to lie about income.

But that would cause too much cognitive dissonance, since they’re in total control of the Obama administration. Low level boiler-room flacks are safe targets that don’t challenge your faith in the New Messiah.

A) As a progressive I am no fan of Obama and didn’t vote for him, or any Democrat or Republican for that matter.
B) I’m well aware of all the revolving door, elite, bankster garbage that Obama has happily let himself be surrounded by.

You’ll have to try another route. You kind of showed your true apologist hand with this “New Messiah” and “Idiot Borrowers” talk.

I completely agree that the bankers should be held to a higher standard. That said, when someone offers you a half million dollars worth of house on a $30,000 income… that’s like going to a doctor and having him offer to throw in a free penis extension. If that doesn’t make you get at least a little bit suspicious of his medical advice, yeah, you’re an idiot. That’s just an assessment, not a call for punishment. Being an idiot is punishment enough. I’ll save the punishment for the actively mendacious, starting with those at the very top, and working down.

Good for you, Navin. If you also call for the return of Glass-Steagall, the reinstatement of Mark-to-Market, leverage limits lowered to pre-Hank-Paulsen levels, the abolishment of MERS, and criminal prosecutions for those who sold toxic MBS, we’re in violent agreement.

Something that people keep forgetting is that the assumption at the time was not that a plumber could afford a $600k house. The assumption was that prices would keep appreciating to the point that the plumber could make a $100k+ profit a year later by selling the house. Obviously this was unsustainable. So the plumber was making a rational, calculated risk, particularly in a non-recourse state. The banker was the one who should have had the wherewithall to recognize that this was unsustainable and protect the funds that he/she was lending out. Not necessarily just the mortgage broker but the asset managers who were requesting the loans so that they could re-package and sell them. The high paid, supposedly sophisticated bankers were willfully negligent.

A friend of mine in marketing has a phrase for sales people. “They are coin operated.”

He means that if you look at what their incentives are to sell you will learn a lot about what gets sold and why.

Any of you familiar with Wendell Potter? He worked in the health insurance industry in PR and communications and explained a lot about how that industry works and what kind of things drove their actions. His story invoked the same kind of outrage in the me. It should have lead to investigations and jail time, but like many of the corporations acting on their prime directive, “shareholder value” they prepared for getting caught by changing what was legal.

I hope to see more about this story and about this VP. These kind of stories are supposed to generate
1) Outrage
2) Investigations
3) If appropriate, fines, prison or both
4) Change in the form of regulations

But it appears that in the money controlled world of today the process stops at outrage. If we ask for investigations we are told that what they did was perfectly legal or that it was an “internal matter of the lender” or that the regulator didn’t really have a problem with tricking people. And hoping for regulations to deal with the abuses? Never! It might stop job creation!

I love journalism that leads to investigations, but I despair at how easily investigations are dismissed because the perpetrators figured out up front a legal strategy for their actions that are morally bankrupt.

An anecdotal note on this guy’s title of ‘vice president’ – I know that at the bank my dad used to work for, half of his department (including him) held that title. In the banking industry, I’m pretty sure that ‘vice president’ doesn’t actually mean ‘next guy down from the President’ like it does in politics or most other companies.

How bizarre are the times when a person can get industrially pepper sprayed for sitting in the wrong place, yet these guys sit at home with the huge bonuses they received for deceiving stupid/naive people and deliberately creating the conditions that crashed the worlds economy. I guess sociopathy has become the new black.

Big deal. Another asshole that would still be doing this shit if it was still making him a huge profit. Now that it is gone to shit, here he is developing some sort of conscience. He is just another fucking coward that did nothing when it mattered and should be put into the stocks with the rest of these corrupt fucks. Nothing he’s saying is new information. We know the banks victimized people, manipulated financial systems, and cheated anyone that they could to make a profit. They are still doing it.

I never knew people couldn’t be trusted to always do the right thing.
/sarcasm

@Antinous_Moderator:disqus
I think if you don’t question people, even if they are suppose to be helping you then you do have yourself to blame as well as the person who shafted you. That applies not only to small things like checking to make sure a clerk gives me back correct change, but auto mechanics, bankers, and even doctors. I don’t put it past anyone to take advantage of another person – it’s been happening for practically ever. That includes doctors doing surgery that isn’t really needed.

I think if you don’t question people, even if they are suppose to be helping you then you do have yourself to blame as well as the person who shafted you.

The problem is that ordinary people don’t have the tools and expertise to second guess the specialists whose advice they depend on. If you never went to medical school you probably don’t know how to read an X-ray, so you depend on doctors to give you an honest professional assessment of your diagnosis and treatment options. The best most people can do in such situations is to get a second opinion, but if every specialist in the field has an enormous financial incentive to give you the same answer that likely won’t help either.

I’m sick of hearing about how all these naive borrowers were stupid to trust the advice of the financial experts who knew (or should have known) better. If borrowers had ignored the advice of such experts and got in trouble as a result then everyone would be piling on them for that too.

I’ll grant you that I know little about the medical field and the only two options would be a second opinion and a lot of reading/studying.

But a mortgage isn’t brain surgery either. Even a shady, greedy, dishonest mortgage broker should be able to run you out an amortization table and show you exactly how much you’ll be paying every month for the life of the loan. Sure someone can sweet talk you into that subprime/no interest loan with little to no money up front. But you don’t need “tools or expertise” to ask how much is this going to cost me. I’m not ignoring the bad advice that the experts gave, but I am also not ignoring the fact borrowers didn’t ask any questions.

I’m not ignoring the bad advice that the experts gave, but I am also not ignoring the fact borrowers didn’t ask any questions.

You ignore the possibility that borrowers did ask questions but got less than forthright answers. If every financial advisor in town is adamantly telling you one thing and your less-than-stellar arithmetic is telling you another, most people decide to trust the experts. Especially if it means they get to buy a house.

Well numbers don’t lie. Unless the financial advisor is giving you false information (lying to you) then it doesn’t matter how pretty of a picture they paint for you.

There is a big difference between being a slick saleman and getting customers to fall for it compared to lying to a customer to get a sale.

The first one makes you just as culpable as the saleman, the second one is or should be illegal.

Banks and most financial people are selling you a service or product. IE they are trying to sell you something. Just like a used car sales person they are going to bend the truth as far as possible and paint any kind of picture necessary to get you to buy from them. If a person buying a mortgage doesn’t understand that then perhaps we need to be teaching financial responsibility in high school.

Our views are obviously different, but not all bankers are evil people. Just like not all customers are intelligent and have done their homework in advance.

Here’s what people were being told. You have a 3 or 5 year ARM loan. during that time you look at an amortization table and your payments are fine. Payments rates were 1-3% + an index, usually a low treasury index. The interest rate though was much higher, so people’s loans are negatively amortizing. The loan documents mostly hid this information.

So people ask, “what about after the 3rd or 5th year.” The answer at that point was “refinance.” To be honest at the time, refinancing was readily available and you could easily get another 3 to 5 years at another very low rate. It wasn’t until the collapse and the banks stopped offering refinancing that people faced the truth about their interest rate. Sure people could have realized that on their income they couldn’t afford a 400k house, but what they saw was their monthly payment rate, and when they asked questions they were told the rate would be that low consistently because they could always just refinance.

Exactly what Wamu did, and Chase continues to sustain the practice somehow. After 3 years of a 3 year ARM, they refused to refinance and let the loan go into some kind of line of credit instead. If I try to pay the principle at all, they reverse the payment. This is very profitable for them, as the payment never decreases if the principle is always the same..
It’s now an adjustable rate line of credit, amortizing in 2099. Nobody knows or cares what the house is worth, as I don’t plan on selling it ever.

I’ve said it before, and I’ll say it again….half of everyone is below average. Its a truly suck world when the above average deliberately screw the below average, and then have people blame them for being screwed. “Caveat Emptor”, like much else from the harsh mores of the Romans, comes from a world where the strong preyed upon the weak as a matter of course. Government regulation is supposed to prevent just such occurrences, but apparently if a huckster has a legally binding contract then all matter of scumbaggery is allowed, cuz, you know, fooling someone who is too dumb/unrealistic/trusting to know they’re being conned is the way the world is, amirite?

I think if you don’t question people, even if they are suppose to be helping you then you do have yourself to blame as well as the person who shafted you.

The difference between the medical industry and the mortgage industry is that a second opinion doctor might solve the problem, but a second opinion broker is more likely to figure out a way to bilk you even more.

There’s one particular cash advance company’s television ads here in Phoenix AZ. I’ve seen four different ad’s and all actors are Mexican with a thick accent, either pregnant, calling from jail, or with some dental problem. Sad.

Personally, I don’t worry about the consequences of stupidity, because they are self-enforcing.

I prefer to think about providing strong negative consequences to injustice and sociopathic greed. It seems that post-Reagan governments want to provide rewards instead, and I have a problem with that.

Especially since they are using tax dollars to reward sociopathic banksters for their greed and financial incompetence.

Well, look, if we lynched every banker who came forward and presented evidence about the doings of themselves and their gang members, then nobody would want to come forward at all, and it would all be hidden behind the cone of silence. At least this way, banksters should be falling all over themselves to tattle, so that the ones who leave it until it’s too late take the fall.

It’s the greater fool theory. These banksters know well how that works.

I think anyone who wants to purchase a house should first buy a computer and some financial software. First off, if you can’t afford that, you can’t afford a house; and second, run the numbers and see if you can afford the mortgage.

Hold on a fuckin minute. I’m a damned software engineer. I have many computers at my disposal, and some knowledge of how to use them. I can afford the house even if I don’t bother to do the math. The problem is, every time I turn around the bank is sticking a red hot poker up my ass. How do I know if any of the stuff they’re doing is illegal? It’s certainly unethical, but they seem to have the law on their side.

Oh come on, “buy a computer and some financial software?” That doesn’t net you any wisdom.

When I was buying a house, sometime before this whole big mess, I was already seeing a lot of financial guidance that I did not feel was appropriate. Our credit union, arguably one of the most conservative (and successful) in the area, readily approved a home loan that was twice as much as what I felt comfortable undertaking, which might just be my financial conservatism or paranoia speaking. I know people in my situation were taking loans out for almost twice *that* figure. I had multiple banks and mortgage brokers telling me about the “modern” ways of figuring out how much house one could afford, and they all seemed insane to me.

Well, we put down 21% in cash, and we’ve paid the house off at a ferocious rate, even having refinanced and pulled money out to cover large expenses. For us, it is clear, now, that we did buy less house than we could have afforded, but it hasn’t hurt us. On the other hand, had I followed the most liberal advice, I think we might not have done as well.

I consider myself lucky to have been quite conservative in what we chose to pursue. However, not everyone will be. How do you know whether or not you can trust the advice you’re being given from multiple bankers? How do you plan to weather economic hard times down the road, without knowing what those might be? It’s not as easy, and advice such as you just gave is not particularly useful.

It’s all about special interests/lobbying. The laws were written by congresspeople who received tremendous amounts of money from these banks. It’s no surprise that all of this happened…follow the money. Joe Consumer gets f*cked. We need to change the rules around special interests, how much they can give, disclosure, etc…

did i miss something? a borrower who’s given more loan that he could weather if the market went down… has he been cheated? if the market went up, he’d make a ton of money. if it goes down, he…. declares bankruptcy. isn’t THAT a moral hazard? isn’t that actually an AWESOME deal for a borrower? i’d love to take that bet right now.

i’m sort of at a loss to figure out how, a priori, this was cheating the borrower. someone help me understand this? and please don’t just say that it didn’t turn out well for them (b/c property value went down). tell me how, in a given market with a random component, that is bad for the borrower.

Banks were supposed to be TRUSTWORTHY because they handle other people’s money. They were supposed to be CAUTIOUS because they gauge the trustworthiness of potential debtors.The gigantic bailout and the fact that it was not accompanied by the sacking of the management ended that era in most of the Western World. That these “bankers” did not finish their careers in utter ruin and possibly suicide means that somewhere down the road they, or people just like them, will repeat the performance, and banks as we knew them will have to be done away with.

If this continues, banks as safe places to put your money in, that only give credit in good faith to those able to pay back are to become a thing of the past. Banks as institutions will be over.

Destroy world economy, lots of proof of wrongdoing – no findings and bonus payments for the players.

They talked about reforms, and somehow the people are still not being held accountable as the toxic crap they created still works its way through the system. And they say the rich don’t get special treatment.

The amount of “blame the victim” in the wake of this whole shitstorm has been troubling. I’m not a doctor, so when I go to the doctor, I cannot tell him ‘You know doc I have a mild case of cardiac arrhythmia. Fix me up.” I expect the doctor to do a thorough job, and give me my prognosis. I’m a pretty smart guy, and I still have trouble quite understanding how points are accumulated on a mortgage. I expect the experts on this, the people I expect to have training, to be duly certified and accredited at providing advisement of these things, to be able to explain it to.

I walk into a bank and say I want to buy a house, I expect the banker to ask me how much I make and then tell me how much a house I can afford. Its a simple process, and banks and their employees willfully shirked that responsibility, willfully bet against those people for whom they shirked that responsibility, and spent enormous sums of money getting people like Phil Gramm to pass legislation making it perfectly legal for them to do all their shirking. Anyone who says it is the borrowers fault for not knowing better can go toss.